Minutes | Board Audit Committee (BAC) Meeting
BAC Attendees: Sarah Deutsch (Chair), Avri Doria, Merike Käo, Akinori Maemura, Mandla Msimang, and Ihab Osman
Other Board Member Attendees: Becky Burr
ICANN Organization Attendees: Xavier Calvez (SVP, Planning and Chief Financial Officer), Franco Carrasco (Board Operations Specialist), Liz Le (Associate General Counsel), Becky Nash (VP of Planning), Brett Peterson (Director Accounting), Shani Quidwai (Sr. Director Finance), and Amy Stathos (Deputy General Counsel)
Invited Guests: Representatives from independent audit firm BDO, LLP and the Independent Financial Advisor to the BAC
The following is a summary of discussions, actions taken and actions identified:
- Review of Draft FY21 Audited Financial Statements – The BAC received a briefing on the FY21 audited financial statements focusing on a few specific points. In particular, ICANN org noted that there is a new format of the auditor's opinion and reported that the org was required to adopt a new revenue recognition standard effective 1 July 2020. The new standard, ACS 606 (ASU 2020-05, Revenue from Contracts with Customers (Topic 606)) supersedes previous revenue recognition standards. ICANN org reported that the adoption of ASC 606 only impacted the timing of the recognition of the revenues of the application fees associated with the 2012 New gTLD Program. No other ICANN revenues, cash balances or funding amounts were affected. Prior to implementing ASC 606, ICANN org was utilizing a percentage-of-completion method based on cumulative costs to recognize new gTLD application fees as revenues. Under ASC 606, ICANN is now recognizing new gTLD application fees as revenues on a per application basis, as the application progresses through the delegation process. The only transactions that resulted in an adjustment to revenue were the remaining New gTLD Program applications from the New gTLD 2012 Program. The adoption of ASC 606 resulted in an increase in net assets of US$32,797,034 and a decrease to deferred revenue of US$32,797,034 for applications that were previously delegated or withdrawn as of 1 July 2020. ICANN org also reported that it is currently evaluating the impact on the consolidated financial statements of a new standard regarding leases (ASC 842) that will go into effect in the next fiscal year.
Review of the Required Audit Committee Presentation by Independent External Auditor – A representative of ICANN org's FY21 independent external audit firm reported on the status and results of its FY21 annual audit. The firm explained that the main purpose of the audit, conducted in accordance with auditing standards generally accepted in the United States, is to obtain reasonable assurance about whether ICANN's consolidated financial statements are free of material misstatements. The audit firm reported that it will be issuing an "unqualified" opinion, indicating that the audit did not identify any material issues.
The audit firm then explained the changes in format of the opinion lettter, which now includes a recitation of the respective responsibilities of the audit firm and management as it relates to the financial statements. The audit firm also highlighted the need to include an "Emphasis of Matter" in the FY21 opinion letter as a result of the impact of adopting ASC 606. The audit firm also reported that while most entities that were required to adopt ASC 606 did not experience much of an impact, ICANN org experienced a fairly significant impact to the recognition of new gTLD revenue. Specifically, the biggest impact to ICANN is that revenue recognition must now be on a per application basis as each application moves through the evaluation and delegation processes. The BAC noted that the potential impact of the ASC 606 standard on revenue recognition should be taken into consideration when designing the Subsequent Procedures round.
The audit firm reported on several aspects of its work as part of its required communications to the BAC. Among other things, the audit firm reported that ICANN org's accounting practices and policies are appropriate, comply with generally accepted accounting principles and industry practice, were consistently applied and are adequately described in the financial statements; that the revenue recognition of transaction fee revenue and new gTLD revenue were recorded appropriately and are reasonable; that expenses appear reasonable and classified; that accounts receivable and allowance appear reasonable; and that investments, investment income and realized and unrealized gains and losses were properly stated and reasonably valued. The audit firm also reported that PTI is properly consolidated into ICANN org's financial statements and expenses appear proper. The audit firm explained the changes observed in ICANN's presentation of its financial statements from the prior year, were done in accordance with new reporting standards for nonprofit organizations.
BAC Workplan – The BAC reviewed the Committee workplan, which is on target. The Committee discussed whether the current cadence of Audit Committee trainings, which are conducted annually, should be maintained or if a different cadence should be considered. The Committee also discussed whether the trainings should be mandatory or optional, given that the new BAC members will be comprised of new and current Audit Committee members. The Independent Advisor advised that industry best practices are to conduct trainings annually, which are mandatory for new members and optional for returning members. The BAC agreed that there should be a training conducted this year. The Committee asked ICANN org to work with the vendor facilitating the training to develop the contents for the training.
- Actions: ICANN org to work with the vendor facilitating the training to develop the contents for the training.
- The BAC continued its discussion on audit firm rotation cadence. The Chair stated that the issue can be discussed via email.
- The BAC discussed ICANN org Executive interviews status. The interviews sessions are a best practice during which individual Executives and members of the BAC have the chance for direct communications without any other staff members present.
- ICANN org reminded the Committee about the two items that will be on future BAC meeting agendas: a possible internal audit function and fraud prevention training.
- The BAC and ICANN org thanked Merike Käo for contributions to the Committee and wished her luck in her future endeavors.
Published on 21 February 2022